Fitch: U.S. Mortgage Servicing Pendulum Shifting Back to Banks

April 14, 2015 09:21 AM Eastern Daylight Time

NEW YORK--(BUSINESS WIRE)--Recent fallout surrounding Ocwen Loan Servicing LLC is bringing U.S.
banks back in greater numbers to the market as buyers of mortgage
servicing rights (MSR's), according to Fitch Ratings.

In recent months, banks have agreed to purchase several bulk packages of
MSR's from Ocwen, a large non-bank servicer. A number of factors are
bringing about this change, among them the regulatory environment,
improvements in bank portfolio makeup, bank interest in maintaining
servicing scale, and market opportunity.

This is a marked change post-crisis, when several banks reduced their
servicing exposure to underperforming loans through frequent sales of
MSR's to non-bank entities. These sales, plus portfolio runoff and the
improved economy and housing market have resulted in bank servicing
portfolios which are now smaller and better performing. As a result,
some banks have now positioned themselves as opportunistic buyers of
MSR's, with an eye towards servicing performing agency loans.

Both bank and non-bank mortgage servicers have been under heightened
regulatory scrutiny post-crisis. While both sectors have recently seen
cases of regulatory findings and settlements, banks appear to be
currently better positioned within the new regulatory framework. Broader
bank controls may contribute to this differentiation. However, prior
scrutiny that bank mortgage servicers saw in comparison to non-banks
likely played a role as well.

In early 2012, key bank servicers were required to institute substantive
changes as part of their agreement under National Mortgage Settlement
(Settlement). Since many of the Settlement requirements were ultimately
included in the Consumer Financial Protection Bureau's guidelines for
all servicers in 2014, subject banks had a relatively easier transition.
The greater comfort that banks have in the current regulatory
environment has situated them as more eager buyers of mortgage servicing
product than was the case several years ago.

Mortgage servicing today remains a business run most economically in
large scale. Some servicers have incorporated techniques such as
offshoring to increase flexibility and to reduce overall costs. However,
most mortgage servicers saw their cost of servicing increase
significantly during the post-crisis period as a result of higher fixed
expenses associated with regulatory compliance. This has provided an
incentive for non-bank servicers to grow, and for the banks which have
large mortgage servicing operations and have seen their portfolios
shrink, to seek to maintain scale when opportunities to acquire clean
and standard servicing become available.

While scale is important, changed capital rules, including Basel III,
will likely constrain significant growth by bank servicers in the
future. Previously banks were able to contribute the full value of their
MSR's to their Tier I capital. Under Basel III, MSR's are limited to 10%
of Tier I capital. To the extent that a bank holds MSR's that exceed the
10% threshold, the excess must be deducted from capital. Banks must seek
to balance the impact of these capital rule changes against their desire
to maintain well-scaled servicing operations.

Fitch will continue to monitor the portfolio transitions of the bank and
non-bank servicers as they seek to maximize economics and strategic
opportunities in an environment of continued regulatory scrutiny.

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